Zero tax proposed for most companies

Peter Martin

MOST Australian companies would pay no tax on their earnings, while some would pay a much higher rate of "super tax" on large profits, under radical plans being developed in the wake of the Gillard government's tax summit.

The change, if fully implemented, would in effect extend the government's minerals resource rent tax across the entire Australian corporate sector.

You will now receive updates fromBusiness AM Newsletter

Business AM Newsletter

"When Australia introduced a consumption tax there was a pretty clear path to follow," he told the conference.

"This is not like that. We need to be careful about unknowns. Having said that, the imperative for the change may well be a little bit stronger."

The nine-person working group is examining a proposal known as ''allowance for corporate equity'', under which no tax would apply to the portion of corporate profits necessary to get a reasonable return on equity.

Most companies, especially most manufacturers, fail to meet that hurdle and so would pay no company tax.

Banks and mining companies make a much greater return on equity and so would be liable for the super tax on the excess portion of their earnings.

Working group member John Freebairn from Melbourne University told the conference the super tax rate could be as high as 40 or 50 per cent.

He nominated McDonald's and KFC as examples of companies able to make larger than normal profits because of the power of their brands.

ACTU secretary Jeff Lawrence, also on the business working group, opened the door for broad agreement on the proposal, telling the conference the union movement would be prepared to accept it on the condition the total company tax take did not fall.

The Business Council of Australia, also represented on the working group, has previously spoken in favour of the idea.

Asked by The Age whether the change would be practical, Mr Heferen said it had been implemented in a number of countries although not on the scale of the GST.

"Belgium has one, Brazil and Italy had it, Latvia has it. But from what I can gather none have done it for the reasons we think it is useful, which is to attract capital and boost labour productivity."

Mr Heferen represents Treasury on the working group and headed the Henry tax review secretariat.

"It would be complex, but company tax is already complex. It would be especially difficult when people were getting used to it," he said.

"Our next step is to properly quantify the cost of change, the actual cost of people moving over to a new system.

''That is something that whatever government Australia has needs to think about. The costs of change might be very significant."

Mr Swan has asked the working group to deliver a report on the proposal by next December.

He has asked for an earlier report on the tax treatment of losses by March.